1972 (1) TMI 6 - HC - Income Tax

Whether Tribunal was justified in holding that part out of the interest paid by the assessee-company on capital borrowed by it, as is attributable to advances given by it to its two subsidiaries free of interest, is admissible as deduction u/s 36(1)(iii) - deduction not admissible

Summary

Issues Involved:
1. Deductibility of interest paid on borrowed capital under section 36(1)(iii) of the Income-tax Act, 1961.
2. Relationship between the assessee-company and its subsidiaries.
3. Reopening of assessment proceedings under section 147 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deductibility of Interest Paid on Borrowed Capital:
The primary issue was whether the interest paid by the assessee-company on borrowed capital, which was advanced to its subsidiaries free of interest, is admissible as a deduction under section 36(1)(iii) of the Income-tax Act, 1961. The Income-tax Officer disallowed part of the interest paid, attributing it to non-business purposes. The Appellate Assistant Commissioner partially sustained this disallowance, calculating it on a daily product system. However, the Tribunal allowed the appeals, holding that the assessee-company carried on its business through its subsidiaries, thus the interest paid on borrowings was for business purposes. The High Court, however, found no material to support the Tribunal's conclusion and held that the subsidiaries were separate legal entities. Therefore, the interest paid on borrowings advanced to subsidiaries free of interest was not for the purpose of the assessee's business and was not admissible as a deduction under section 36(1)(iii).

2. Relationship Between the Assessee-Company and Its Subsidiaries:
The Tribunal concluded that the assessee-company conducted its business through its subsidiaries, implying a lack of distinction between the holding company and its subsidiaries. The High Court rejected this view, emphasizing that the mere ownership of all shares in a subsidiary does not make the subsidiary's business the business of the parent company. The Court referred to established legal principles and case law, such as Odhams Press Ltd. v. Cook and Smith, Stone and Knight Ltd. v. Lord Mayor, Aldermen and Citizens of the City of Birmingham, to underline that the business of a subsidiary can only be regarded as the business of the parent company if there is functional control in addition to capitalist control. The Court found no evidence of such functional control in this case.

3. Reopening of Assessment Proceedings:
The assessment proceedings for the years 1962-63 and 1963-64 were reopened under section 147 of the Act to bring to tax the disallowed interest expenditure. The assessee argued that all relevant facts were available at the time of the original assessments and no new facts had emerged to justify reopening. The Tribunal did not address this ground due to allowing the appeals on the merits. The High Court's judgment implies that this aspect should be reconsidered by the Tribunal in light of the Court's findings.

Conclusion:
The High Court answered the referred question in the negative and against the assessee, holding that the interest paid on borrowed capital advanced to subsidiaries free of interest was not deductible under section 36(1)(iii). The Tribunal is directed to dispose of the appeals afresh, considering the evidence and the law, and addressing the issue of reopening the assessments. The assessee was ordered to pay the costs of the reference, with an advocate's fee of Rs. 250.